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Archive for November, 2008

Am I going overboard?  I hope not, hate getting wet.  Let’s see what Dennis Beresford, former chairman of the FASB and current accounting professor, has to say about my previous post.  Denny is quoted from AECM, the international listserv for accounting professors.  On Thursday, November 27, 2008, he says:

Dennis Beresford, former Chairman of FASB, now accounting professor at University of Georgia

Dennis Beresford, former Chairman of FASB, now accounting professor at University of Georgia

Last year I had Julie Erhardt speak to my graduate accounting classes and meet with some of our accounting faculty. Julie is the SEC Deputy Chief Accountant in charge of all of the international accounting effort. One of the faculty members asked about how we could teach IFRS on top of U.S. GAAP. Julie gave what I thought was a very interesting and insightful response.

Julie said that perhaps we could change our approach to financial accounting to one in which most of the focus in the first place was on business issues.  For example, if covering lease accounting, the instruction could begin with the differences between buying and leasing an asset, what are the economics of doing one vs. the other, and what would be the effects on financial statements of capitalizing leases vs. expensing lease payments as they are incurred.  Then the coverage could move on to the fundamental principles that determine whether leases should be capitalized or not e.g., how much of the fair value is covered by lease payments. Only after the economic issues and the basic principles are covered would some of the details (e.g., what to do with contingent rentals) that distinguish IFRS from GAAP be mentioned. In this approach, about 50% of the effort would be on the economics, 25% would be on the principles (that ought be to pretty similar), and 25% on the rules (that could be different).

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Well, the die seems to be cast.  President Obama will call for a big-bang switchover to IFRS, this much is likely.  I personally predict that the last year GAAP may be used in the U.S. by SEC reporting companies is for fiscal years ending December 31, 2010.  The Obama administration will rework the proposed Road Map.

Today’s topic, though, is a preliminary discussion on how accounting education must change under the new regime.  I think accounting professors must now teach financial statement  planning and strategy in the same way that tax professors teach tax planning.

Under IFRS, flexibility and alternatives are the key  words.  According to Harvey Pitt, former Chairman of the SEC, “The reality is that it will likewise be possible that two companies in the same industry will report differently under IFRS.  Investors and regulators will have to adjust to life under this new regime, and there is no time like the present—or at least the near future—to start getting used to it. ” (Pitt, 2008)  The only limiting factor will be for corporate executives to decide what, in their professional judgment, they wish to report in the financial statements.  Almost anything will go.

If corporate executives are being given the freedom to report any number they wish in the financial statements, then what should be the guiding principle(s) behind their choices?  The answer, loyal readers, is that Income Smoothing has again come to the United States.

Once upon a time in the United States, Income Smoothing was a common practice in the United States.  Income Smoothing, quite simply, is judicial use of accounting machinations to change accounting reports so that they tell a desired story.  In its purest form, Income Smoothing takes a time-series of reported net income and smooths it until a trend is apparent.  Peaks are squashed, valleys are filled in, and an aesthetic trend line remains.

Income Smoothing as applied to a bumpy stream of actual net income.

Income Smoothing as applied to a bumpy stream of actual net income.

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Note:  this is the final version of this essay.

This is part seven of an eight-part series in which I review the seven International Financial Reporting Standards (IFRS) critics (Sunder, Niemeier, Ball, Ketz, Selling, Jensen & Albrecht) of whom I am aware.  The series continues on regular posting dates, MWF.

In today’s essay, I review the anti-IFRS views of myself, David Albrecht, Ph.D.  An accounting professor at Bowling Green State University in Ohio, I have been a vocal opponent of the proposed switchover in accounting standards for quite a while.  Until starting this blog two months ago, my primary forum was via posts to AECM, the e-mail listserv for accounting professors.

I am opposed to IFRS for the U.S. because (1) the politics of the decision are unwarranted, (2)  I believe it will be bad for the country, and (3) it will not aid the world in creating an integrated financial system. (more…)

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